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Last month, we wrote about how aging senior housing communities could reinvent themselves by repurposing older buildings to affordable senior housing.  In this Part 2, we identify a potential source of equity to make it happen. 

Low Income Housing Tax Credits

One of the major challenges to the development of affordable housing is that there is typically a large gap between the costs of the project and the amount of financing that can be supported by operational cash-flow.  In many affordable transactions, the gap is filled with equity generated from the procurement of Low-Income Housing Tax Credits (LIHTCs).  These credits can significantly lessen the financial burden of conversion or repurposing senior living facilities into affordable assisted living or age-restricted senior housing.

LIHTCs provide developers and owners with a significant equity contribution towards the new construction, substantial rehabilitation, refinance, or acquisition of affordable housing projects.  The program is administered by the Internal Revenue Service (IRS) through State Housing Finance Agencies and local Development Agencies.  LIHTCs connect investors with sponsors and developers, providing the investors with considerable tax benefits over a period of approximately 10 years in exchange for their investment into the creation or preservation of affordable housing properties.

LIHTCs are generally available under two programs:  9% credits and 4% credits.  The 9% credits cover more development costs but are extremely competitive to secure and often require a sponsor to commit to a higher degree of affordability with respect to rents and income limitations of residents.  Moreover, the highly competitive and limited-supply 9% credit is typically reserved for new construction without any other federal subsidies.

The 4% credits, which often are accompanied by an allocation of tax-exempt multifamily housing revenue bonds, is typically allocated on a non-competitive basis.  The 4% credits are considered part of the bond allocation, and given these credits are more accessible than their 9% counterpart and are available for repurposing existing buildings, the 4% execution will likely be the more likely product available.

LIHTCs provide the equity for an affordable senior housing development; however, additional sources of financing will be needed to complete the capital stack. 

Please see next month’s final Part 3 for a discussion of debt options available.